Implications of the COMESA Free Trade Area and Proposed Customs Union: an Empirical Investigation

Trade liberalisation and economic integration are central to the success of the Treaty establishing the Common Market for Eastern and Southern Africa (COMESA) regional trading bloc. COMESA’s liberalisation and integration programme boasts of a free trade area (FTA) launched in the year 2000 in which at least half of the twenty member states are currently participating. The regional bloc’s integration programme is envisaged to be taken further through the formation of a customs union via a common external tariff (CET) planned to be in place by end of 2004. This study provides a quantitative assessment of the likely implications of the implementation of the COMESA Treaty to establish the FTA and then form a customs union through the CET. The focus of the analysis is on the implications of the accompanying trade liberalisation on macroeconomic aggregates including those that have a bearing on poverty reduction; industry structure; welfare; and the trade diversion versus trade creation question. The study uses a multi-country multi-commodity applied general equilibrium model ⎯ GTAP (Global Trade Analysis Project) ⎯ in its analysis. The study sought to provide empirical evidence relevant to the policy debate on the following questions. First, what countries gain and which lose based on the impacts on GDP, employment and other macroeconomic aggregates from the FTA and customs union. Second, based on the empirical evidence of the resulting industry structure from the FTA and customs union formation, what can be said on the question of whether COMESA should proceed at its current speed to be a customs union considering that some of its members are also members of the South African Development Cooperation (SADC), which also aims to move to a free trade area although at a reduced speed than COMESA. Third, using the simulation results of the implications of the FTA and customs union on value added in different sectors, can the study show what sectors lose and what sectors gain for each of the five COMESA member countries. Fourth, what are the welfare implications for the five COMESA member countries and which of them gains and which lose from the FTA and the customs union? Fifth, how does the formation of COMESA FTA and customs union affect trade expansion through the trade creation and trade diversion effects? The following are some of the findings of the study. COMESA is better of with free trade. There are positive economic gains for all regions from free trade. So the regional bloc should move to liberalise faster to realise the gains. While some countries will benefit more, the implementation of the liberalisation policies would need to be undertaken with long-run outcomes in mind. Second, the economic gains from the liberalisation process will need to be placed in perspective of the entire political and strategic interests of different member nations in COMESA. Policies to distribute gains equally and efficiently might also need to be formulated. Third, it is clear from the study that COMESA seems better off with a customs union. While FTA gives good outcomes, the customs union must be preferred. However, the analysis of our results have also suggested that the medium-term framework of the transition from FTA to a custom union may not be appropriate as the sectors where growth from the customs union would be optimised take longer to adjust. Fourth, the results from both the FTA and customs union implementation are clear that trade diversion will not take welfare gains away. So the counter arguments for free trade policy in the region are not so valid. Member nations should consider trade liberalisation as a serious policy. It is a policy that has potential to contribute to poverty reduction in the long-run especially from lower incidence of income poverty.